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Fiscal cliff, growth in EU, executive pay – welcome to 2013

Happy New Year! We at Proxima hope that 2013 has begun productively and happily. There has certainly been no time to ease into the year gently - 2013 definitely has picked up seamlessly from where 2012 left off which, in our eyes, means continued opportunities and increased potential for enhancing value for our clients.

Many challenges persist, however. Not least on the UK high street with Jessops and now HMV calling in the administrators. These difficulties serve as timely reminders that, irrespective of various pointers towards stability, we are in no way out of the woods and there has to be concerted effort from Government and industry to ensure that we do not retreat back into negative territory.

Before Christmas, we pointed to the fiscal cliff looming large, as the United States battled internally to find a way forward amid the pre-programmed tax increases and spending cuts. The eleventh hour consensus, of sorts, alleviated some of the immediate concerns, but while the latest battle may have concluded, the war continues with the acrimony between Democrats and Republicans only heightening. Another round of debt ceiling drama once again threatens America's economy, global financial standing and, ultimately, the confidence of US consumers. With Republications demanding dramatic spending cuts in exchange for another ceiling lift and Obama seemingly unwilling to negotiate, we hold our collective breath in the hopes that reason, common sense and compromise can ultimately overcome dysfunction.

The Eurozone continues to be a concern though the view in the UK is being rather overcrowded by the debate about the nature of the country's relationship with the EU. It is an important debate, but one that should be placed in the context of the wider situation in Europe, not forgetting that many businesses, ours included, have successfully expanded into the continent and opportunities exist for those able to manage pan-European engagements effectively.

As we move into annual remuneration rounds again, we have noticed a recurrence of the arguments against executive pay awards. Last years research gave us much to think about in this regard, as it revealed the extent to which third-party costs impact a company's financial performance when compared to personnel costs. Third-party costs account for 68% of revenue, on average, whereas personnel costs represent only 12%. With those figures put in context, we suggest that the argument is heading in the wrong direction.

Is the debate really about executive pay? Or should it be broadened out to focus on corporate waste?

As our research showed, a one-percent reduction in third-party costs could unlock up to 17% in wasted profits each year. So, is a CEO's compensation package really the best determiner of a company's ethos, performance or shareholder value? Or is there a greater prize for investors to go after? We're preparing some more thoughts on this and we'll be sharing them with you in due course.

We look forward to working with you again in 2013 and we wish you well for what is sure to be another engaging, challenging and stimulating year.

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Andrew Sinn

If there is waste, it's because of the executives' lack of proper oversight.

Nigel Ralph MCIPS

Executive salaries should be performance based, companies should look at what value they bring to the company as is carried out for all levels. To many times and occasions these executives are paid high salaries but do not add any value. They are their as a figure heads and some of the decisions made are costly in the respect of time and resources. Executives in most companies are out of touch with what's going on at grass roots and the do not understand the time it takes to archive what is needed due to wasteful processes and procedures

Martin Hogan

Are you arguing that, as executives permit waste, they should be given a pay rise? Being responsible for how companies spend their money, it is not in the public domain to determine how they manage their daily affairs. One reason third party costs have risen is that companies contract out more of their business, this is just an accounting tool and I sure you don't need me to go into the details of a failing economic model. You seem to be missing the point, which is that FTSE350 remuneration has risen by over 100% over the past 10 years, with pensions performing even better, whilst pay to the average employee has contracted and pensions wiped out.

Is it right that the government should have to subsidise low wages with child benefit, housing payments etc, so that executive staff can be paid more? Surely companies should pay their own way and make sure that the staff can afford to live without outside assistance?

The objection to executive pay is that it is disproportionate when compared to the pay of the 95% of employees, to the work they do and for the results achieved.

regards

Martin Hogan

Im not sure even perfomance based hits the mark. Many workers on piece work etc end up with pay cuts if they perform well - piece rates are moved.

We are social creatures and pay should be balanced as sufficent for all to live comfortably, not for a few to end up with billions of dollars and not now what to do with it all, while (at present) half the population will not be able to afofrd to buy a home.

Everyone thinks they are worth more but the question is, where can that capital best be used:

1. In the banks (offshore) of the rich 2. In luxury goods 3. In ensuring a stable and socially responsible society where poverty is not considered a pesonal failing 4. treating scare resources as things to be fought over, rather than managed and also creating situations where resources become scarce so that few can afford them without resorting to divisive competition

Why do executives need to keep pushing their pay up way beyond the rational limits, when others both in and outside their companies are going without?

Regards

Guy Strafford

Martin - thanks for your comments. I am not debating the rights or wrongs of the level of executive remuneration. Although I would note that 1. they are driven by market forces; and 2. recent research suggests that the performance of (better paid) UK FTSE100 Chiefs outstrips their FTSE250 counterparts performance, indicating you get what you pay for (see here: http://www.pattersonassociates.co.uk/latest-news/financial-times-patterson-index-articles-january-13th-2013.html).

The point I am making is that the focus placed on the level of executive pay, whilst important, would have a greater impact on shareholder value if it were to focus on ensuring that the organization is maximising the value it achieves from its third party cost base. And that’s because labor accounts for only 12% of annual revenues, whereas third party costs account for 68%.

Melinda McDougall

I totally agree that executives in general have been rewarded disproportionately to the rest of the workforce, who seem to be the first to forego any pay awards(and don't have the opportunity to earn bonuses either!) All employers should ensure that they pay their staff a living wage - as Martin said, it should not be down to the Government to supplement the low wages of so many when the executives are paid handsomely for being scrooges!!

Lisa Mueting

I believe it takes the efforts of all employees in an organization to make the organization profitable, not just the work of one individual.